Market analysis: Volatility despite better US data

The currency markets remain volatile as Federal Reserve talk dominated risk trends last week and, as expected, the US dollar continued to post gains against its major counterparts.

The recent run of data from the United States suggests improving economic conditions in the US – non-farm payrolls last month came in above 250,000 with decent traction in wage growth – and several key Fed officials noted such improvements when they addressed the media last week.

The San Francisco Fed president, John Williams, stoked dollar bulls when he stated that “it makes sense to get back to a pace of gradual rate increases, preferably sooner than later”.

Mr Williams is not alone in this matter, with his Fed counterpart in New York, William Dudley, also maintaining a rather bullish outlook about the US economic situation and further stoking rate hike expectations in his speech on Thursday.

This was capped on Sunday, when the Fed vice chairman, Stanley Fischer, also gave reassurances of a strengthening US economy and hinted at a hawkish Fed.

The comments from several Fed officials would no doubt bring the rate hike trade back on the table and, looking ahead, we will keep a close eye this Friday, when the Fed convenes at its yearly Jackson Hole policy symposium and the Fed chairwoman, Janet Yellen, delivers her speech.

The message emanating out of the Fed has been mixed at best; while some in the bank remain dovish towards future rates others remain hawkish, as seen with Mr Dudley and Mr Williams last week.

Mrs Yellen is expected to address future rates in her speech, and although Jackson Hole has been a backdrop to major economic policy announcements in the past, we do not expect a clear and concrete stance this Friday.

Mrs Yellen is expected to focus on inflation rates and maintain an upbeat and hawkish view, all of which is expected to see heightened levels of volatility and ultimately, stoking the dollar further in the weeks ahead.

Some of the other key US economic releases this Friday will include revised second-quarter GDP – 1.1 per cent expected versus 1.2 per cent previously – and consumption – 4.2 per cent expected versus 4.2 per cent previously.

The monthly US non-farm payrolls report is due on September 2. The upcoming payrolls report is expected to show gains slowed to 160,000, below the 255,000 outcome from last month.

Across the pond, the British pound continued to trade in a lower range. Initially, the pound rallied early in trading last week as a result of a weakening dollar, however the move topped out at 1.32 levels, which remain the upper resistance level for the pound against the dollar.

We maintain our bearish view on the pound and expect another test of the 1.2865 levels against the greenback as the psychological effect of the Brexit vote continues to play out.

And finally, commodities held their gains amid a stronger dollar. The Dubai Gold and Commodities Exchange (DGCX) benchmark crude contract smashed through our upper resistance at $44 last week before topping out at 49.30 levels. Upsides in the crude contract will be capped going forward as we have approached the higher channel at $50 per barrel. The DGCX gold contract held strong at $1,330, however we could expect elevated volatility in this contract, as the Fed convenes on Friday and this could lead to $1,310 levels for gold in the week ahead.

Gaurav Kashyap is the head of futures at Axitrader in Dubai.

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